Market Timing

Market timing is a hot compliance topic in the US. But SFC released a survey report in 2004, which claimed that market timing was not prevailing in HK. Actually we have seen a few cases in HK about late trading, but not market timing.

Market timing means frequent buying and selling of funds in order to exploit inefficiencies in fund pricing. While market timing is not illegal per se, it can harm other fund investors by diluting the value of their units / shares. Such practice can also disrupt the management of the fund's portfolio and cause the fund to incur costs (borne by other investors) to accommodate frequent fund dealing by market timers (typically hedge funds).

The market timing scandals erupted in the US over the past few years involved those firms which secretly allowed selected investors to rapidly trade the mutual funds despite such practice was banned in the fund prospectus. The double standard that favors one group of investors at the expense of another is illegal.

Yesterday in the US, Prudential Equity Group was ordered to pay US$600m in a global settlement of fraud charges in connection with deceptive market timing of mutual funds.

An old dog plays no new trick. Prudential's brokers defrauded mutual funds by misrepresenting their own identities and the identities of their brokerage clients to engage in market timing after the mutual funds had placed blocks attempting to prohibit such trading. The brokers used multiple Financial Advisor (FA) numbers to evade the trading restrictions. If one FA number was blocked, the brokers traded by using another FA number. Prudential failed to put in place an adequate supervisory system to prevent the market timing activities.

In light of those cases happened in the US, we may understand that market timing could not be done without the facilitation by fund distributors.